NEW YORK — Wall Street entered into another round of speed dating, with bankers representing Morgan Stanley and Washington Mutual scrambling to put together deals in the biggest realignment of the financial industry since the 1930s.
Once vaunted investment banks like Bear Stearns, Merrill Lynch & Co. and Lehman Brothers Holdings Inc. have lost their independence or been toppled at a breath-taking pace. And for a time on Thursday, fears intensified that the spreading credit crisis threatened to drag down the remaining global financial institutions and Main Street banks alike.
Shares of financial stocks initially plunged, then recovered as part of a dramatic afternoon reversal for most stock indexes after CNBC reported that Treasury Secretary Hank Paulson might back the creation of an entity like the Resolution Trust Corp. to soak up bad loans and defaulted mortgages. The RTC was created by the government during the savings and loan crisis of the 1980s.
Treasury officials declined to comment about whether that report was accurate.
Morgan Stanley slumped more than 46 percent in early trading as investors fretted about its ability to quickly find a buyer or cash infusion from a foreign investor. Goldman Sachs Group Inc. skidded 25 percent.
Morgan Stanley shares rallied to close up about 4 percent, while Goldman Sachs' stock was lower by almost 6 percent. And Washington Mutual Inc. shares soared more than 48 percent.
Senator offers alternativeSen. Charles Schumer, D-N.Y., put forth his own proposal, calling for the government to lend struggling banks money in exchange for an equity stake. In return, banks would back legislation allowing homeowners who have declared bankruptcy to renegotiate their mortgages in order to keep their homes. Schumer contends that an RTC-like entity could find it difficult if not impossible to sell off complex mortgage-related investments.
That might provide the lifeline needed to help prop up the ailing banks and investment banks, said Anthony Sabino, professor of law and business at St. John's University. He noted, however, that CEOs might still go ahead with deals they believe make sense.
"This is history repeating itself," he said. "The debacle of the S&L crisis created the RTC, and we are faced with a similar crisis because we didn't learn from history. This is yet another lifeline."
But the question is whether such a plan could be turned into reality soon enough to take the pressure off Morgan Stanley and Goldman Sachs to do deals.
"People are finally realizing that we are probably in the worst financial crisis since the Depression," said Alfred E. Goldman, chief market strategist for Wachovia Securities, a 49-year veteran of Wall Street. "We're in a period of excessive fear."
Stable funding base soughtRecent market turmoil has heightened fears that investment banks, which rely heavily on short-term borrowing to finance their proprietary trading and lending businesses, need to find more stable sources of funds to ride out market volatility.
Some investors believe that the investment banks must combine with an institution that offers a stable base of bank deposits. That was one of the reasons Merrill Lynch agreed to be acquired by Bank of America Corp. earlier this week.
Economists, including former Federal Reserve Chairman Alan Greenspan, predict that more banks will fail in a shakeout reminiscent of the Great Depression. After the stock market's crash in 1929, 9,000 institutions failed and $140 billion of deposits were wiped out in the following decade.
The government adopted policies to protect bank depositors since then and government agencies have already closed nearly a dozen insolvent banks while making provisions to reopen them under new ownership in recent months.
Global banks and brokerages have written down more than $350 billion of distressed investments since the crisis began last year, and now bankers are looking to avoid becoming another statistic.
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